Common Mistakes Investors Make With Retirement Funding

Creating a solid, reliable investment portfolio to fund your retirement is complex. Depending on your age, income and goals, your road to success will look different than your neighbours.

However, while the paths to success may look different, the roads to ruin tend to look very similar. 

So, we’re going to cover six of the mistakes we see most often, so you can avoid them and stay on your path.

Mistake 1: Dividend double down

At a glance, doubling down on dividends seems like a safe bet. You buy the stock, and the company gives you a steady, quarterly payment, which often goes up over time.

What’s not to like about that?

To be clear, there is nothing wrong with dividends. However, when we become too focused on the ‘easy money’ that dividends provide, it can push us to make poor investment choices.

For example, some investors choose only dividend-paying stocks. That decreases diversification, which builds risk into a portfolio. Alternatively, some investors ignore stronger stocks that will pay a greater return in the long term because they prefer dividends, resulting in a lower rate of return.

Mistake 2: Capital gains tax terror

If you hold your investments long enough to see significant growth, you can expect a sizable tax bill on those profits when you pull your money out (unless you’re investing in a TFSA). And that hurts.

Nobody wants to pay taxes on their nest egg, but avoiding capital gains at all costs is another case of losing focus on the basics. But this time, instead of getting lured out of sound investing practices by quarterly payments, you’re getting pushed into keeping stocks you have little reason to keep just to avoid the tax man.

While that big lump sum tax payment disappearing may not feel good, divesting at the right time is going to pay off in the long term. 

And no matter what happens, that tax bill is not going to disappear. So, you’re much better off paying it when it makes the most sense for your investment portfolio.

Mistake 3: Last-minute RRIF withdrawals

You don’t have to withdraw from your RRIF until you’re 72, but that doesn’t mean you should wait that long. 

All RRIF withdrawals are taxed, so people tend to avoid them until the government, or their finances, require them to start pulling funds. However, those who plan to retire early may find they have a lower income in their 60s than in their seventies, in which case they would pay less tax by pulling the investments before they’re required.

Plus, pushing off those withdrawals may affect your Old Age Security (OAS) by pushing you into a higher tax bracket, leading to OAS clawbacks.

Mistake 5: Jumping the gun to CPP/OAS

You want to let those investments you spent your life accumulating just keep growing. That leads most Canadians to take their Canadian Pension Plan (CPP) and OAS benefits at the age of 65, to fill in their income while their investments continue to grow.

However, both OAS and CPP increase each year they’re deferred (8.4 per cent and 7.2 per cent, respectively). This increase, combined with the built-in inflation protection and dependability of the payment make CPP/OAS a great hedge for those who expect to live beyond 80.

Mistake 6: Poor use of TFSAs

Tax-Free Savings Accounts has ‘savings account’ in the name, so it makes sense to use it as a holding account for savings. However, investments can also be held in a TFSA, and this makes a lot more sense.

By holding savings in your TFSA you can protect your investment income from capital gains tax without resorting to holding on to investments that no longer make sense to you.

Mistake 7: Incorrect asset allocation

With RRSPs, TFSAs and non-registered accounts, investing can get tricky. So, investors often make it simpler by holding the same assets across their savings vehicles.

But, depending on the return on investment, some investments just make more sense with some vehicles. If you have high-earning stocks, you may want to keep them in the TFSA to make sure you’re not going to get a big capital gains bill when you withdraw money. 

Your lower-paying, steady GICs make more sense in your RRSP, which is 100% taxable or in non-registered accounts, where you only need to pay capital gains on 50% of the return.

Build your foundation first

The biggest mistake investors make is taking their eye off the tried and true basics to chase after easy money or avoid the tax bills you can’t avoid. 

However, that rarely ends well. When you’re building your nest egg, focus on that foundation first, and don’t let the trends, taxes or dividends take your eye off the ball.